TRIS Rating Co., Ltd. has affirmed the company rating of Asia Sermkij Leasing PLC (ASK) at “BBB+” with “stable” outlook. The rating reflects ASK’s experienced management team in the auto financing business and the company’s ability to maintain its market position despite the slowdown in the automobile sales during the past two years. In addition, strong positions in selected niche markets for commercial vehicles, support from major shareholders, efficient risk management systems, and long-term relationships with dealers also support the rating. However, these strengths are partially offset by the nature of ASK’s auto loan portfolio, which is considered more volatile to adverse changes in economic factors, despite generate higher returns. Intensified competition during upward trend of interest rate might squeeze the spread and constrain profitability. The rating takes into consideration the deterioration in asset quality of a subsidiary, Bangkok Grand Pacific Lease PLC (BGPL), despite an improvement in overall asset quality since late 2009. ASK has diversified its sources of funds to secure the financial flexibility which has been constrained by regulatory lending limits from a major funding source.
The “stable” outlook is based on TRIS Rating’s expectation that ASK will be able to maintain its market positions in the niche markets for commercial vehicles. ASK’s experienced and capable management team plus efficient risk management and operating systems will help the company control asset quality. Support from major shareholders is expected to continue. The outlook also takes into consideration the fact that ASK will have sufficient funding flexibility, both for relieving liquidity constraints and for future expansion.
TRIS Rating reported that although domestic demand for automobiles dropped by 10.8% in 2009, ASK has been able to maintain its market position in retail auto financing loans, which was the largest portion of the consolidated loan portfolio. Outstanding retail auto financing loans totalled Bt10,257 million in 2009, up 9.5% from Bt9,364 million in 2008. In 2010, the recovery of the domestic economy and the automobile sales supported an expansion of ASK’s retail auto financing loans. The portfolio value reached Bt11,406 million at the end of June 2010, up 11.2% from the end of 2009. However, ASK’s consolidated outstanding loans increased by only 3.8% in 2009 to Bt12,267 million from Bt11,820 million in 2008, mainly due to slowdowns in the leasing and factoring businesses of the subsidiary. The size of outstanding consolidated loan portfolio rose in the first half of 2010 to Bt13,467 million, or up 9.8% from the end of 2009. At the end of June 2010, 84.7% of the consolidated loan portfolio was retail auto financing loans held by ASK, up from 79.2% in 2008 and 83.6% in 2009, while the proportion of BGPL’s leasing and factoring loan portfolio decreased to 15.1% of consolidated loans, down from 16.1% in 2008 and 20.5% in 2009.
TRIS Rating said ASK’s overall customer concentration risk is considered low, due to the nature of retail auto financing loans. In addition, its diversified portfolio mix of retail auto hire purchase loans helps reduce product concentration risk. At the end of June 2010, ASK’s outstanding retail auto hire purchase loans comprised passenger cars and pick-up trucks (37.8%), vans (23.0%), big trucks (25.4%), taxis (11.6%), buses (0.9%), and refinancing loans (1.2%). In general, although loans for commercial vehicles, such as big trucks, vans and taxis, have generated higher returns, the composition of such assets in the loan portfolio causes an operator to carry higher credit risk than other major auto financing companies which have concentrated on passenger cars and pick-up trucks. To mitigate the higher risk, ASK implemented a segmentation strategy and focuses on the less risky specific sub-segments of each asset type and target customer group.
Despite a seemingly riskier loan portfolio, ASK’s ratio of non-performing loans or NPL (loans with more than three installments past due) to average loans is considered low, when compared with other auto financing companies. The experienced and capable management team, efficient risk management system and conservative underwriting policy are the factors that help the company keep asset quality at a satisfactory level. However, the NPL ratio did rise from 0.99% in 2005 to 1.78% in 2008, but improved to 1.45% in 2009. In addition, intensified competition in the auto financing industry has pressured the profitability of ASK and other major operators. The return on average equity (ROAE) ratio improved to 11.00% in 2009 from 10.56% in 2008 while the return on average assets (ROAA) ratio was at 1.57% in 2008 and 1.58% in 2009. The company’s ROAA ratio was considered low in a cross-industry comparison. The ROAA ratio substantially improved to 2.14% for the first half of 2010 (annualized), mainly due to a rise in net interest income and lower provisioning expenses. However, more time is needed to demonstrate if the profit improvement is sustainable.
In terms of funding sources, ASK has benefited as an affiliate of Bangkok Bank PLC (BBL). However, this benefit has been constrained by the regulatory lending limits to related entities of a financial institution, released on 3 August 2008 by the Bank of Thailand (BOT). The regulation limits the amount of debt financing from a commercial bank to any related company. Debt financing provided to related entities is capped at not over 5% of a commercial bank’s capital funds or 25% of the borrower’s liabilities, whichever is lower. The regulations limit ASK’s financial flexibility and the ability to enjoy a secured source of funds from BBL. ASK’s borrowings from BBL have been reduced since late 2008 and the amount of borrowings stay below regulatory limit at present. ASK has been trying to diversify its funding sources to other financial institutions and the capital markets, including bill of exchanges (B/E) and debentures, by keeping the available credit line from BBL as a financial cushion to mitigate its liquidity risk. At the end of June 2010, ASK’s funding through B/Es was 15.6% of total consolidated borrowings. In general, funding through B/Es exposes to refinancing risk. However, ASK’s refinancing risk can be mitigated by monthly installment payments and the establishment of back-up credit facilities that completely cover ASK’s funding needs. In the mid of this year, the company has already refinanced its Bt3,000 million borrowings with new three-year borrowings, said TRIS Rating. -- End
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